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Rules of Engagement for Residential Real Estate Investing

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2019 NEXTGEN Conference Keynote Address for the Houston Trust Company. Presented by Neal Dikeman, Managing Partner, Old Growth Ventures

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Rules of Engagement for Residential Real Estate Investing

  1. 1. Keynote Address Presented at 2019 NEXTGEN Conference for Rules of Engagement for Residential Real Estate Investing www.oldgrowthventures.com Neal M. Dikeman
  2. 2. Why Do it? - Residential Real Estate Returns are Similar to Equities with Less Volatility • “residential real estate and equities have shown very similar and high real total gains, on average about 7% per year [c. 11-13% nominal]” • “that housing returns are similar to equity returns, yet considerably less volatile, is puzzling” Federal Reserve Bank of SF, Dec 2017
  3. 3. What We Do
  4. 4. Old Growth Ventures Our business is simple: • ​Find • Buy • Rehabilitate • Lease • Unique focus on historic properties with tax credits • Experts in sustainable living and historic rehabilitations • A single mission: save 1,000 historic homes while driving profits
  5. 5. Historic Preservation Fund I, LP • Specialty Real Estate Tax Advantaged Income and Growth Fund backed by 7 family offices • Managed by Old Growth Ventures LLC • Focused on Adaptive Reuse and SFR Certified Rehabilitations of Certified Historic Structures on the National Register of Historic Places
  6. 6. 908 Sabine Project Old Sixth Ward Historic District 1890 Folk Victorian & 1915 Craftsman • 2020 Good Brick Award Winner • Texas Historical Commission Certified Historic Rehab 2018
  7. 7. Carter-Milroy-Canfield Houses • 1922 Craftsman Bungalows in the Heights • Historic Project Plan Approved by Texas Historical Commission 2019 • Preliminary Determination for National Register Approved by National Park Service • National Register Approval exp 2020 • In Rehabilitation: Exp Completion 1Q 2020
  8. 8. Victor Street Historic Rehab Project Freedmen’s Town Historic District • Ten 1915-1920 Shotgun Row House Rehab Project • The last shotgun row in Houston’s original African American community • Listed in Houston Architectural Guide • Exp Completion Date 2Q 2020
  9. 9. Investing Rules of Engagement
  10. 10. You Are What You Eat Successful real estate investors are usually focused and disciplined Market chasing looks like it works right up until the market turns down or you overpay
  11. 11. Rule #1 Buy the smallest house on the biggest lot in the best neighborhood you can afford Surrounded by 7 figure owner occupied homes Remaining un-updated neighboring homes currently under expansion remodel
  12. 12. Rule #2 Like Texas Hold’em, the money is made in what you don’t play, if you play every hand, you lose
  13. 13. Rule #3 New House Value = 3- 4x the Land Cost 10-30% development margin Heavily leveraged 75- 90%+ Usually vertically integrated $70-$150/sq ft in build costs
  14. 14. Rule #4 Speed Kills, but you Live with Your Purchase Forever • Good opportunities either sell very fast or very slow • Development time is very costly • You cannot recover from overpaying • But if the rental is profitable, you can hold 3-5%/yr Minimum Appreciation Needed for Raw Land 1%/Month Development Carrying Costs
  15. 15. Rule #5 Your Own Home is Not an Investment • is NOT an Investment Your Own Home • is NOT an Investment Your Own Home • Is NOT an Investment Your Own Home
  16. 16. Tools and Concepts
  17. 17. Concepts to Know • Deferred Maintenance – Amount of investment needed to make up for prior underinvestment in repairs • Occupancy rate -% of days/year rented • NOI – Net Operating Income, Revenues minus operating cost • Cap Rate – NOI/Purchase Price • Highest Valued Use – The theoretical use of the land or property that would yield the highest expected return • Comps – Similar or comparable properties used to establish value • DSCR – Cashflow /fixed payments ratio, 1.3x is usually the investor loan minimum • ARV – As rehabbed value • Wholesaling – Purchasing properties for immediate flip to other investors • Recourse v Nonrecourse – loans guaranteed personally, vs only secured by the property
  18. 18. Valuation is Multivariate Value is function of: • Rents • Completed sale price • Comps • Location • Land value • Size • Updates • Design • Highest valued use • Market demand
  19. 19. Flipping • Goal is to buy cheap, rehab fast and sell quick • 10-30% average margin • Speed kills – slow projects destroy returns • Almost all done with lots of leverage • 25-35% equity capital • Margins heavily susceptible to purchase price and reno timeline/estimates • Most flippers vertically integrate with either • Real estate brokerage or • Construction mgmt Flipping provides a crucial market service, but … very few stay in the business long
  20. 20. Renting Property is Not Rocket Science • Keep it rented at all costs • Turnaround fast • Manage costs • Your customer matters • Your supply chain matters • 55-75% cash margin
  21. 21. Multifamily v SFR Key Differences • Economies of scale in investment, construction, and management for multi-family • Apartments rent for less than houses, and usually higher turnover – the dreaded common wall • Apartments are more commoditized than houses, and typically more volatile • Rent multiple should be lower • Apartment Cap Rates now down into the 4%-6% • Deferred maintenance and occupancy can dominate returns • SFRs can see value uplift from gentrification • Apartments always sell for > of land value and cap rate • SFRs are more fungible than apartments, but with lower barriers to entry • Not all neighborhoods make good SFR rentals • Customer segments are different
  22. 22. Neal M. Dikeman • Managing Partner, Old Growth Ventures, General Partner of Historic Preservation Fund I • US Senate Nominee, Libertarian Party 2018 • Venture capitalist and 7x tech startup founder, multiple exits; CEO, Chairman, CFO, VP, and board of directors roles in public, private, nonprofit • Successful private equity and venture capital funds management experience: Shell, Jane Capital, Globalgate, D&B LLC (CalPERS) • Banking and finance roles at multi-nationals Bankers Trust, Royal Dutch Shell • BA Texas A&M in History & Economics Questions?

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